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Introduction to financial Mgt

Financial Management encompasses strategic planning, organizing, directing, and controlling financial activities to achieve organizational objectives. Key functions include financial planning, budgeting, investment management, and risk management, with goals centered on maximizing profitability, sustainable growth, and increasing shareholder value. The document also distinguishes between money markets for short-term funding and capital markets for long-term investments, highlighting their respective instruments, purposes, and risk levels.

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3 views

Introduction to financial Mgt

Financial Management encompasses strategic planning, organizing, directing, and controlling financial activities to achieve organizational objectives. Key functions include financial planning, budgeting, investment management, and risk management, with goals centered on maximizing profitability, sustainable growth, and increasing shareholder value. The document also distinguishes between money markets for short-term funding and capital markets for long-term investments, highlighting their respective instruments, purposes, and risk levels.

Uploaded by

mungarevanig10
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Financial Management refers to the strategic planning, organizing, directing, and

controlling of financial activities within an organization. It involves the management of funds


and financial resources to achieve the organization’s objectives efficiently and effectively.

Key aspects include:

1. Investment Decisions: Determining where to invest funds for the best returns.
2. Financing Decisions: Choosing the right sources of funding, such as equity or debt.
3. Dividend Decisions: Deciding how much profit to distribute to shareholders versus
reinvesting in the business.
4. Cash Flow Management: Ensuring that the organization has sufficient liquidity to
meet its obligations.
5. Risk Management: Identifying and managing financial risks to safeguard assets and
earnings.
Functions of a Financial Manager

 Financial Planning:

Developing strategies to manage finances and forecasting future financial performance.

 Budgeting:

Preparing detailed budgets to allocate resources efficiently and monitor financial performance
against those budgets.

 Investment Management:

Evaluating and selecting investment opportunities to maximize returns and manage risks.

 Capital Structure Management:

Determining the optimal mix of debt and equity financing to support business operations.

 Cash Flow Management:

Monitoring cash flows to ensure the organization has enough liquidity to meet its obligations.

 Financial Reporting:

Preparing financial statements and reports for stakeholders, ensuring compliance with
regulations and standards.

 Risk Management:

Identifying financial risks and implementing strategies to mitigate them.

 Cost Control:

Analyzing costs and implementing measures to reduce unnecessary expenses while


maintaining quality.

 Performance Analysis:

Assessing financial performance through ratios and metrics to guide decision-making.

 Liaison with Stakeholders:

Communicating with investors, creditors, and other stakeholders regarding financial matters
and performance.
Goal of the firm

1) Maximizing Profitability:
Achieving the highest possible profit through efficient operations and effective
management.
2) Sustainable Growth:
Ensuring long-term growth and expansion while maintaining financial stability.
3) Increasing Shareholder Value:
Enhancing the value of the firm’s shares through strategic decision-making and
performance improvements.
4) Risk Management:
Identifying and mitigating risks that could adversely affect the firm's financial health
and operations.
5) Customer Satisfaction:
Providing high-quality products and services to meet customer needs, fostering
loyalty and repeat business.
6) Employee Welfare:
Ensuring a positive work environment, fair compensation, and opportunities for
employee development.
7) Corporate Social Responsibility (CSR):
Conducting business in an ethical manner, contributing positively to society, and
minimizing environmental impact.
8) Market Positioning:
Establishing and maintaining a strong competitive position in the market.

The Agency Problem

The agency problem arises when there is a conflict of interest between the stakeholders in a
company, particularly between the owners (shareholders) and the management (agents). This
occurs because:

 Information Asymmetry: Managers often have more information about the


company's operations and prospects than shareholders.
 Divergent Interests: Managers may prioritize personal goals, such as job security or
compensation, over the company's profitability and shareholder interests.
Money market

The money market is a segment of the financial market where short-term borrowing and
lending of funds occurs.

It deals with financial instruments that have high liquidity and short maturities, typically less
than one year.

The money market is used by participants to manage their short-term funding needs and to
invest excess cash.

Key Features:

 Instruments: Includes Treasury bills, commercial paper, certificates of deposit, and


repurchase agreements.
 Participants: Primarily involves banks, financial institutions, corporations, and
governments.
 Purpose: Provides a mechanism for managing liquidity, facilitating the flow of funds
between savers and borrowers, and maintaining stability in the financial system.

Capital market

The capital market is a financial market where long-term securities, such as stocks and
bonds, are issued and traded. It provides a platform for raising funds for long-term
investments and financing projects.

Key Features:

 Instruments: Includes equity securities (stocks) and debt securities (bonds) with maturities
longer than one year.
 Participants: Involves a wide range of entities, including corporations, governments,
institutional investors, and individual investors.
 Purpose: Facilitates the allocation of capital, enabling businesses to raise funds for expansion
and development, while providing investors with opportunities for returns on their
investments.
Difference Between Capital Markets and Money Markets

Aspect Capital Markets Money Markets


Markets for long-term financial Markets for short-term financial
Definition
instruments. instruments.
Stocks, bonds, and long-term Treasury bills, commercial paper, and
Instruments
securities. certificates of deposit.
Maturity
Typically greater than one year. Generally, less than one year.
Period
Raising capital for long-term Managing liquidity and short-term
Purpose
investments. funding needs.
Risk Level Higher risk and potential returns. Lower risk and lower returns.
Corporations, governments, Banks, financial institutions, and
Participants
institutional investors. corporations.

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